Deposit insurance without stability

The Federal government has moved to insure deposits in accounts up to the value of $20,000 should a bank collapse. And if there isn’t enough money following such an event, other banks and APRA regulated institutions will foot the bill. So it is a form of deposit insurance; although the premium is paid after the fact.

Basically, what this does is formalise what the government would have likely done anyway. In that respect, it is a good move. But it falls far short of the sort of insurance system we would need to improve financial instability. Put simply, if you have more than this minimum in a bank, should there be a collapse, you will face losses. So in the event of a bank run, 50 percent of more of account deposits will be un-insured and so their owners may well contribute to the run making it more likely that the bill for the remainder will come due. Indeed, in that respect, this scheme seems to be sending the message to large account holders: you are on your own.

This state of affairs is in no one’s interest. We need to provide an insurance scheme for deposits and work out how best to fund it. To be sure, it will reduce the return on savings but that is a small price to pay for some real stability. The Government’s job in this area is far from finished.

Oh and by the way, the arguments that this will make banks take more risky moves is a red herring. First, they are regulated and insuring them increases the case for that. Second, how many CEOs of past bank and financial institution collapses have been able to restore their careers? It is far short of destitution but I am not sure that by insuring deposits CEOs have any more incentive to risk their institution’s viability.